A good example is Aim-traded online gaming company 32Red (TTR:127.25p), a holding that has produced a 170 per cent total return since I initiated coverage three years ago ('Game on', 7 Jul 2013). I updated the investment case in an online article a week ago when I concluded that the investment risk still favoured further upside ('Spinning higher', 2 August 2016). The same applies to two companies I featured in last week's Brexit winners column, litigation funding specialist Burford Capital (BUR:390p) and engineer Trifast (TRI:135p) ('Brexit winners', 1 Aug 2016). The holdings have so far produced total returns of more than 164 per cent each and offer decent potential for further gains. That's not to say that I am averse to banking profits when an investment has fulfilled its potential.
SRT Marine Services hits all-time high
Aim-traded shares in SRT Marine Services (SRT:58p), formerly known as Software Radio Technology, a provider of maritime domain awareness (MDA) technologies and products, surged to 59p at the end of last week, their highest level since the company floated on the junior market in 2005. It's a company I have been very favourable on, having initiated coverage with a speculative buy rating at 31.25p ('On the radar', 3 Mar 2015), and reiterated that bullish advice no fewer than four times this year:
■ Buy at 25p ('Software Radio surges on huge contract win', 9 Mar 2016).
■ Buy at 34.5p ('Software Radio beats expectations', 13 Apr 2016).
■ Buy at 40p ('Software Radio making waves', 7 Jun 2016).
■ Buy at 43p ('Contracts boost Software Radio', 5 Jul 2016).
The primary reason for my positive stance reflects the rapid build-up of sales on the back of a raft of contract awards and the potential profits to be earned by converting a validated sales pipeline worth £200m. We can expect a sharp rise in profits this year after SRT was awarded a €90m (£76m) contract with an Asian country just before its March year-end ('Software Radio surges on huge contract win', 9 Mar 2016). In fact, analyst Eric Burns at WH Ireland expects SRT to deliver revenues of £12m and increase pre-tax profits by more than 150 per cent to £700,000 in the 12 months to end-March 2017. I still believe this could prove to be a conservative forecast if the ongoing contract momentum continues to build.
That said, at the current price the company has a market value of £74m and the shares are trading on almost 100 times EPS estimates of 0.6p, a valuation that's discounting not only a successful execution of the contracts won to date, but a rapid surge in profitability in the coming years. I feel the management team at SRT is capable of delivering, but I am also of the view that the best of the gains are probably behind us unless the board can pull off another major contract win like the one in March. That's because to justify the current valuation, the company would have to increase net profits sixfold within the next three to four years. From your correspondence, it's clear that many of you have more than doubled your money on this holding, and I feel there is no harm in crystallising those hefty gains with the shares now trading on a bid-offer spread of 56.5p to 58p. Take profits.
D4T4 share price surge
SRT Marine Services is not the only company on my watchlist to have changed its name and seen its share price re-rate sharply. The same is true of D4T4 (D4T4:140p), a small-cap company formerly known as IS Solutions and one specialising in three web-related areas, namely portals, enterprise content management and 'big data' analytics with a key specialisation in business intelligence.
I first advised buying the shares at 120p earlier this year ('Big data, big profits', 8 Feb 2016), advised running profits at the end of March (‘Big data, big rating’, 30 Mar 2016), and then recommended buying around the 117p level during the market turmoil post the EU referendum ('Big data, big potential', 28 Jun 2016). My new price target was 145p, so the shares are just shy of that price point. At the current price they are rated on almost 16 times EPS estimates of 8.9p for the financial year to end-March 2017 and offer a prospective dividend yield of 1.5 per cent based on a 10 per cent hike in the payout. That seems a fair rating to me for a company forecast to deliver 5 per cent earnings growth in the current financial year, albeit this follows a doubling of EPS in the preceding 12 months. It clearly represents a fair rating to non-executive director Roger McDowell, who sold 500,000 shares at 132p each last week to reduce his holding to 1.85m shares, or 5.07 per cent of the share capital. The 140p target price of house broker FinnCap has been achieved too.
The point is that, although D4T4 has great prospects in the fast-growing big data analytics markets, and has posted a series of earnings beats, I now feel that a rating of 16 times earnings estimates is fair value in the more uncertain business environment post Brexit, and one that prompted the Bank of England to cut base rate and restart its bond-buying programmes last week.
So, if you followed my earlier buy advice, I would follow Mr McDowell's lead and crystallise your 18 per cent paper profit. Take profits.
Amino share price fires up
Another tech company that has seen its share price rocket is Amino Technologies (AMO:145p), a Cambridge-based set-top-box designer of digital entertainment systems for IPTV, home multimedia and products that deliver content over the open internet. I recommended buying the shares only a month ago at 111p ('Deep value small-caps', 12 Jul 2016), having initiated coverage at 83p ('Set up for a buying opportunity', 10 Jun 2013). The price has since surged by 30 per cent in the past four weeks, and the holding has produced a total return of 91 per cent, including dividends of 13.95p a share since I initiated coverage. At the current price Amino's shares are rated on 12.5 times earnings estimates, and offer a 4.2 per cent prospective dividend yield.
It's easy to see why investors have warmed to the investment case. Not only is the business back on track, having sorted out the issues that led to a profit warning last autumn, but with more than half of first-half revenue derived from North America, and almost a third from Europe, sterling's sharp devaluation since last June is likely to provide a strong currency headwind on translation of overseas earnings.
Non-executive chairman Keith Todd and his wife can obviously see value as they have bought just shy of 50,000 shares in the past week at prices as high as 146.25p. I would recommend running your bumper profits ahead of the next trading update. Run profits.
Oakley significantly undervalued
Of course, banking profits is fine, but you still need to recycle the cash into a fresh investment to keep the capital working for you. Bearing this in mind, I feel investors are being overly harsh with their valuation of Oakley Capital Investments (OCL:129p), an Aim-traded private equity investment company and one I included in my 2016 Bargain Shares portfolio when the shares were priced at 146.5p.
The subsequent share price performance is clearly at odds with the portfolio's performance. In fact, in a trading update for the six months to end-June 2016, the company reported a 12p-15p a share rise in its net asset value, up from 200p a share at end-December 2015. The significant weakening of sterling post the EU referendum has undoubtedly helped, as this factor contributed 13p a share to the uplift, but the underlying performance of the funds Oakley invests in were positive too and contributed an uplift of 9p a share.
True, the flotation in mid-June of media group Time Out Group (TMO:136p), the globally recognised brand of city-based leisure magazines, hit the market at the worst possible time as investors were in 'risk-off' mode in the run-up to the EU referendum, and the immediate aftermath too. Time Out raised net proceeds of £58m after transaction costs and paying down debt, to give it a market capitalisation of £195m. Oakley's investment in Time Out was worth £91.7m at the 150p-a-share flotation price, up from its end-December 2015 valuation of £88.5m, making it a sizeable holding in relation to Oakley's net asset value of £382m at the time. And with Time Out's share price falling to 127.5p at the end of June in the aftermath of the Brexit vote, this had the effect of wiping out £13.8m, or 7.3p a share from the carrying value of Oakley's investment. The good news is that the holding has recovered 2.5p a share of that 7.3p decline in the past five weeks as markets have recovered their post-Brexit losses.
This means that Oakley's spot net asset value could actually be as high as 217.5p, or almost 9 per cent more than at end-December 2015. Moreover, sterling has weakened further against the euro and US dollar since Oakley's portfolio was valued at the end of June, giving a modest valuation uplift to the sterling value of the portfolio, a large part of which is held in overseas investments.
I highlighted the investment potential of Oakley in quite some depth in the spring ('Take time out to consider Oakley', 25 Apr 2016), giving sound reasons why its investee companies have decent scope for valuation uplifts. This bull point has not changed. Indeed, the 9p-a-share first-half valuation uplift in the funds the company invests highlights the investment potential. There is obvious value in the shares, too.
Not only are they rated on a 41 per cent discount to spot net asset value of 217p, but with cash and interest receivables accounting for 58p a share of net asset value, then in effect the private equity portfolio and the interest in Time Out Group are being attributed a value of only 71p in the current share price, representing a 55 per cent discount to their combined book value of 159p a share. That's an incredibly harsh valuation for a company that produced a 33 per cent return on its investment portfolio last year, driven by strong increases in the cash profitability of the investee companies. On a bid-offer spread of 128p-129p, I rate Oakley's shares a strong buy.
Exploiting investment opportunities
There are many other investment opportunities to exploit, which is why I have written more than 170 online columns since the start of this year, so offering a substantial number of fresh investment ideas for you to consider. For instance, I have published in-depth online articles on the following companies this month, all of which all are available on my homepage and may be worthy of further investigation if they meet your specific investment requirements:
■ Accrol: Buy at 118p ('Brexit winners', 1 Aug 2016).
■ Burford Capital: Run profits at 390p ('Brexit winners', 1 Aug 2016).
■ Juridica: Buy at 61p ('Brexit winners', 1 Aug 2016).
■ Minds + Machines: Buy at 10p ('Brexit winners', 1 Aug 2016).
■ Trifast: Run profits at 135p ('Brexit winners', 1 Aug 2016).
■ Satellite Solutions Worldwide: Buy at 6.25p, target 9p to 10p ('Into orbit', 2 Aug 2016).
■ WH Ireland: Recovery buy at 94p ('The inside view', 2 Aug 2016).
■ 32Red: Run profits at 135p ('Spinning higher', 2 Aug 2016).
■ Flowtech Fluidpower: Buy at 103p, target 157p ('Priced for a fluid re-rating', 3 Aug 2016).
■ Avingtrans: Buy at 190p, target 230p ('Priced for nuclear gains', 3 Aug 2016).
■ MXC Capital: Buy at 3.02p, target 3.75p ('Playing the flotation game', 3 Aug 2016).
■ Miton: Buy at 25p ('Miton priced for recovery', 4 Aug 2016).
■ Arbuthnot Banking Group: Buy at 1,530p ('Banking on value creation' 4 Aug 2016).
■ Crystal Amber: Buy at 148p, short-term trading target 163p ('Amber Alert', 4 Aug 2016).
